Here is an update on the gas market environment and dust parameter (minimum permitted vault debt). I plan to begin posting these updates on a more regular basis to help the community stay aligned on the dust parameter and respond to changing conditions.
Ethereum recently activated the London hard fork, which initiated EIP 1559. This creates a fairly large change to the gas fee market. Gas fees are now separated into two sections, a base fee and miner tip. The base fee is variable and depends on recent levels of network utilization, while the miner tip is decided by the user to incentivize miners to include their transaction quickly.
The previous 15,000,000 gwei gas limit is now a soft target - individual blocks can contain up to 2 times this amount (30,000,000 gas), but any blocks with gas over the 15M target lead to an increase in the base fee, making future transactions more expensive. Blocks containing less than the 15M gas target lead to a reduction in the base fee. By targeting average block sizes of 15M rather than relying on a hard limit, the gas fee market may have more supply elasticity and be better able to accommodate short term spikes in network utilization. However, this is not expected to reduce gas prices overall, as the network will still accommodate the same 15M gas per block on average.
EIP 1559 is still very new, and many wallet providers have not yet upgraded their user interfaces to allow users to set base fee and tip separately. So the full impact of this change on gas market conditions is still unknown. Ideally, splitting base fee and tip should allow users with low time preference to avoid overpaying for gas and bidding up fees, so we may see some improvement in gas conditions over time as the change is rolled out more widely. It is unlikely that EIP 1559 will lead to lower gas expenses during periods of peak utilization (eg a market crash with many defi liquidations), so there may not be a material impact on our dust limit strategy.
Source: gasnow.org, 30 August 2021
The above chart shows gas prices over the past week. With a few exceptions (likely associated with NFT releases), gas has been averaging around 80 gwei. This has increased from an average closer to 50 gwei over the past month.
Over a longer timeframe, we can see gas prices are significantly lower than they were during the bull market period earlier this year, but have been rising recently.
Source: Ycharts, 29 August 2021
We optimize our dust parameters with an eye towards gas spikes during market downturns. So we can’t be sure if the gas prices reached during a crash would see a similar reduction versus previous crashes earlier this year.
Reference: Dust Parameter Analysis Sheet
Based on current gas market conditions, I would not recommend any changes to dust parameters at this time. Recent NFT releases have pushed gas prices up to hourly averages of 500 gwei or more, suggesting that market downturns could still cause significant spikes even in a relatively lower gas environment. And with the recently enacted proposal to reduce liquidation ratios (leading to better capital efficiency for users and increased DAI generation), our buffer of safety against gas spikes has also declined somewhat.
For large cap tokens (ETH-A, WBTC-A, etc), our current positioning allows us to remain protected against 15% intra-hour price drop with gas spiking to 1,250 gwei.
But we see if liquidation ratios are reduced to 145% as proposed, our protection drops from 1,250 gwei to 1,000 gwei as shown below.
Similar dynamics play out for mid/small cap collateral assets (which are proposed to have liquidation ratio reduced from 175% to 165%) - our protection from gas spikes during a 25% intra-hour price drawdown falls from 1,250 to 1,000 gwei gas.
It’s also helpful to consider user gas costs, as borrowing amounts under 10,000 DAI already lead to a significant increase in annualized cost of borrowing due to routine gas expenses. In summary, I believe that Maker is well positioned on the dust parameter and should not pursue changes for the time being.